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“The top 25 hedge fund managers made more than all the kindergarten teachers in the country,” declared President Obama in a discussion of poverty at Georgetown University. Calling them “society’s lottery winners,” he proposed to hike their taxes.
Predictably, battle lines have been formed between two polarized sides. One side—let’s call them the Gauche for convenience’s sake—is unhappy with the pay disparity. CBS News, in an almost neutral tone, asks, “Which group provides more value to America?” The reader is supposed to somehow answer that question, presumably in favor of teachers. Gawker goes much farther, calling hedge fund managers the biggest gangsters of all. It asserts, “It is, as the myth goes, capitalism at its most pure…”
The other side—let’s call them the Adroit—defends hedge fund managers. PJ Media said, “That single comment [about winning the lottery] defines the president’s economic worldview. Success doesn’t come to those who act rationally in pursuit of their values. It doesn’t come from hard work performed intelligently.”
Both sides get it partly correct and partly in error. The Gauche correctly observe something monstrously unfair: ever-larger financial profits accruing to an ever-shrinking group. However, their basic assumption is false. We do not have capitalism today. And their policy is the same old cliché: soak the rich.
The Adroit are also correct about something. More taxes will not help anyone, and making money is not a lottery. However, in their desire to oppose the other team, they are missing the elephant in the room—rising assets, and falling yields. They too assume that we have capitalism. The reality is that all capital markets are massively distorted. Getting rich isn’t blind luck, but sometimes it’s not properly earned either.
Capitalism means free markets, the opposite of central planning. How could anyone look at our financial system and call it a free market? We have central planning of the most fundamental price in the economy: the rate of interest. Central banking is a key feature, not of capitalism, but of socialism. Indeed in The Communist Manifesto, Karl Marx states, “5. Centralization of credit in the hands of the State, by means of a national bank…”
Every major country in the world has a central bank. All are caught up in the same megatrend—falling interest rates. A lower rate means rising bond prices. For more than three decades, we have had a relentless, ferocious bull market in bonds. Bond speculators have pulled down trillions.
By a variety of mechanisms, the rising price of bonds bleeds into other markets and causes stocks and real estate to rise. For example, when the Fed buys bonds, then the sellers usually buy other assets.
The freefall in yields harms wage earners. How are you supposed to save for retirement with zero interest, and therefore no compounding? And it strangles pensioners, who can no longer live on the interest on their savings.
It is a fact that we have central planning today. While this harms people who are working or retired, it seems to help those who own assets—and their fund managers. A falling interest rate converts everyone’s wealth into their income, which is an unsustainable process.
Rather than arguing about whether hedge fund managers or teachers should make more, we should condemn this unfair system. We are against central banking and central planning, not those who make money. It’s impossible to tell what a fund manager should be paid, other than in a free market.
Don’t hate the player, hate the game.
Keith,
Isn’t this analogous with saying that real interest rates have largely been negative since the mid-80’s?
Mark
Keith: Very interesting metric. Fits in with a recent meme “Many of us are rentiers now — whether we want to be or not” kicked off by Thomas Piketty…
That is an excellent observation. However, I prefer the chart not inverted to show the loss in purchasing power. In the link below I added what could be labelled Gold Purchasing Power, i.e., gold/10-year yields. Interesting.
https://stockcharts.com/h-sc/ui?s=%24TNX%3A%24%24CCPI&p=M&b=1&g=0&id=p71453674262&a=406127784
Thanks for the comments.
miamonaco: The discussion of “real” vs. “nominal” interest rates is based on the idea that the dollar is 1/P (P is the price level). If prices double, then that means the dollar has lost half its value. This is wrong on several levels and for many reasons. One, per the first graph in this article, companies are constantly cutting real costs. Two, there are many nonmonetary forces that push prices up including: taxes, California water mismanagement, environment restrictions, regulation, permitting, labor law, litigation, etc. Anyways, in this view, the interest rate we see is not real. To calculate the real one, subtract the CPI.
This isn’t what I am saying, above. I am saying don’t think of selling your assets to buy food. That is to consume your capital. I am saying thinking of the return you get on your portfolio, and buying food with that.
Phil: I looked at the graph but I don’t understand. What did you do with gold? Thanks.
This is an insightful article, Keith, and it’s the first time I’ve seen both currency debasement and increases in efficiency both taken into account in an assessment of the damage. Here’s what I tell people: You know (or may not know) that the dollar is only worth 4% of what it was worth in 1913. What happened to the other 96%? That value was stolen through currency debasement. But what about all the incredible increases in efficiency, economies of scale, etc. that have come about since then? Shouldn’t prices be MUCH LOWER than they were in 1913, all other things being equal? Shouldn’t the dollar buy much more now, rather than less? THAT VALUE WAS STOLEN TOO! It’s akin to Bastiat’s “Things not seen” argument.
Sorry. The link mangled the chart. All I did was to divide gold by the CPI and got interesting results.
davidnrobyn: The dollar was worth 1505mg gold in 1913. Today it is worth about 26.25. This is a loss of 98.3%. I agree it’s theft. And that theft of value is the *least* of the harms done to us by the fiat dollar regime.
Keith, I think this is a very nice and appropriate chart. But why not have another line drawn, giving the development of earnings? That is as an example average hourly earnings adapted to inflation?